Unaffordability of Borrowing by the Poor

Ideally, market-rate finance is a blessing to both borrowers and lenders. This is similar to all kinds of commerce. Producing and selling all kinds or products and services is meant to benefit both buyers and sellers. But, there are times when people need the product or service but cannot afford to buy it. This is as true with finance as with food, shelter, electricity, health care, or any other good. People may need access to money who may not qualify for credit or who may be offered only unaffordably high interest rates. As with any other product, when this happens it is no longer a commercial transaction, but a subsidy, transfer, or gift. We don’t usually expect that producers will sell their goods and services at a loss or give them away for free. Instead we depend on donors, aid organizations, or governments to subsidize or purchase and donate items to those in need. Yet at the same time, we do expect, or at least hope, that those who have in abundance will be generous.

Finance is similar to any other sector in this respect. The Bible commends generosity in finance—

If any of your kin fall into difficulty and become dependent on you, you shall support them. Do not take interest in advance or otherwise make a profit from them. (Leviticus 25:35-36)

If there is among you anyone in need, a member of your community in any of your towns within the land that the Lord your God is giving you, do not be hard-hearted or tight-fisted toward your needy neighbor. You should rather open your hand, willingly lending enough to meet the need, whatever it may be. (Deuteronomy 15:7-8)

—much as it commends generosity in goods,

In reply he [John the Baptist] said to them, “Whoever has two coats must share with anyone who has none; and whoever has food must do likewise.” (Luke 3:11)

Generosity is important. But, markets with prices are likely not the best way to show generosity to family members (“kin” in Leviticus 25:35) and needy people. If we consider the grain market we see that God created the foundation for grain markets in that we are social, not everybody is equally skilled to grow grain, grain does not grow equally well everywhere, grain cannot be harvested every day of the year, grain is nutritious and our bodies cannot ingest enough grain at the time of harvest to last until the next harvest. The Bible does not contain a general prohibition on buying and selling grain. However, the Bible does encourage us to not hoard grain and to give grain away to the poor, the widow, and fatherless (Leviticus 19; Luke 12:16-21). The Bible has similar teaching about financial resources as we have seen above. There is no biblical dissonance between allocating most financial resources via markets with a price (interest rates) as intended by God in his creation design, and also sharing some financial resources freely (zero interest rates) with family or the poor. Both cases can show love to others. To those who have productive opportunities for money, lending with interest can be love. Lending interest-free to family and the poor who have not other access to funds can also be love.

In general, the fact that finance deals in money, rather than goods and services, does not give lenders a greater obligation to do charity than other businesses and institutions. In fact, any business that ceases to operate profitably is actually destroying the value it is meant to bring to society. As we have seen, the foundations of finance include its benefit to lenders as well as to borrowers. Whenever a financial institution gives away money, it deprives its own investors of some of their anticipated return. Given that the largest investors today are pension funds,[1] charity to borrowers comes largely at the expense of retirement income to pensioners. So, as in other industries, large-scale charity is not the role of finance.

Exploitation of Borrowers

Financiers have a duty to lend profitably, but they are not to profit from the vulnerability of borrowers.

You shall not lend them [people in difficulty] your money at interest taken in advance, or provide them food at a profit. (Leviticus 25:37)

In other words, a lender should not exploit the “difficulty” faced by a potential borrower in order to gain profit or force onerous terms such as collecting interest in advance. The passage as a whole speaks specifically to the requirement to lend to kin (Leviticus 25:35), but once a decision has been made to lend for whatever reason, the obligation not to exploit the borrower’s difficulty applies to everyone.

The moral issue arises from the imbalance in power between the lender and borrower. The lender has plenty of money, but the borrower is in a desperate situation. Even in many market-rate situations today, the lender is more powerful than the borrower. For example, a bank generally has far greater resources, information, legal knowledge, legislative influence, and geographic presence than a customer taking out a loan. Sometimes laws prevent certain kinds of exploitation in lending, but even when exploitative lending is legal, it is wrong. In any case, no industry can thrive over the long term by exploiting its customers. One contribution Christians can make in finance is to use whatever influence we have as depositors, employees, investors, directors, agents, and voters to reduce the exploitation of vulnerable people.

Unproductive Use of Proceeds

God’s intent is that finance be a form of sharing, over time, among borrowers and lenders. There is only something to share if the loan makes increased productivity possible. So borrowers and lenders both have a responsibility for the use of borrowed money. A mortgage may increase the borrower’s productivity by reducing housing costs. A car lease may make it possible for the borrower to get to work efficiently. A business loan may be used to finance equipment, inventory, receivables or other assets for growth. On the other hand, a mortgage made on speculative property or without income verification or without sufficient equity may damage both the borrower and lender. A car lease with teaser rates or a back-end balloon payment of more than the car is worth may encourage the borrower to buy a car he or she can’t afford. A business loan made without due diligence may be squandered on unproductive assets.

These examples reinforce the biblical view that finance is a shared obligation of borrower and lender. Borrowers are obligated to limit themselves to loans that will make them productive and that they can be reasonably expected to repay. Lenders are obligated to assist borrowers in this task and to decline to lend in unsuitable circumstances. In practice, this can be quite difficult to accomplish. Borrowers may lack the knowledge to gauge the suitability of loans, or they may simply be short-sighted or impulsive. Lenders may also mis-gauge the suitability of a loan, or they may be greedy, unscrupulous, or short-sighted.

For example, the global financial crisis of 2008 began with defaults on mortgages that were based more on speculation—by both borrowers and lenders—than on good housing opportunities. Lenders were aware that repayment would depend on housing prices continuing to appreciate from their already rapidly-growing levels. But because they generally sold the mortgages on to institutional investors and recouped their money quickly, they had little incentive to exercise care for borrowers’ long-term interests. Ultimately all three kinds of participants—borrowers, mortgage originators, and investors in collateralized mortgage obligations—paid little attention to the time-bound nature of finance and the importance of relationships in which all parties share in the risks and gains. By contrast, lending according to biblical principles requires that all parties care whether the loan—the borrower’s use of proceeds—is truly productive. 

Is There Still Scope for Finance to Fulfill God’s Purposes?

As these situations show, in a fallen world, there are situations in which market-rate finance does not meet the needs of some potential borrowers while also benefiting lenders. Just because God created the foundations for markets and prices, does not mean finance is always capable of bringing complete stewardship, justice and love to resource allocation. We must be careful not to worship the market or justify something because it is an outcome of a market transaction. Financial markets are a blessing from God, but they are not the only blessing and will not be a blessing in every circumstance. Governments and nonprofit organizations are also blessings from God. Further, in a fallen world, markets and financial institutions can cause great harm to society and to individuals. The market needs to be balanced with other institutions in society and always evaluated against God’s will for us as revealed in his word.[1] There is still a scope for finance to fulfill God’s purposes, but only through God’s redemption can finance be restored to his original design.